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Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession

  • Bhanu Balasubramnian
  • Ajay A. Palvia
  • Dilip K. Patro
Article
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Abstract

We examine the association between the book-to-market (B/M) ratio and the subsequent earnings and default risk of US banks in the period around the Great Recession. We find that banks with higher B/M ratios have consistently lower future earnings and greater earnings volatility. In addition, these banks have higher loan delinquency, more charge-offs, and lower Z-scores. We show that the B/M ratio signals information about a bank’s earnings and default risk about four to nine quarters before actual poor performance. Thus, the results show that the B/M ratio can provide advance signals for market monitoring of banks.

Keywords

Market discipline Bank performance Risk assessment Book-to-market ratio 

JEL Classification

G21 G28 G14 

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Copyright information

© This is a U.S. Government work and not under copyright protection in the US; foreign copyright protection may apply 2018

Authors and Affiliations

  • Bhanu Balasubramnian
    • 1
  • Ajay A. Palvia
    • 2
  • Dilip K. Patro
    • 3
  1. 1.College of Business Administration, Department of FinanceThe University of AkronAkronUSA
  2. 2.Policy Analysis DivisionOffice of the Comptroller of the CurrencyWashingtonUSA
  3. 3.Complex Financial InstitutionsFederal Deposit Insurance CorporationWashingtonUSA

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